Does a Sales-Tax Holiday Give a Boost to Small Businesses?

Taxes

Article

08/05/2015

A growing number of cities and states have created a "sales-tax holiday" in recent years—days on which shoppers don't have to pay sales tax on certain types of purchases. But while they've become a politically popular solution, do they actually generate more revenues for small businesses?

They surely can be a boon to shoppers. Many cities and states now have sales taxes, some with rates that top 9%. Shoppers in those states thus get a big discount when they shop during a sales-tax holiday. (The Tax Foundation compiled a list in 2014 of the states with the highest average local sales tax rate. Tennessee, Arkansas, and Louisiana landed in the top three spots, respectively.)

More lawmakers have proposed sales-tax holidays in recent years to encourage their residents to shop at local businesses rather than buy things online, where consumers often pay little or no sales tax. They also argue that a sales-tax holiday can discourage locals from driving to neighboring cities and states with lower or no sales tax. Montana and Oregon, for example, have become havens for shoppers because they charge no sales taxes.

Many such holidays have been proposed to support specific types of purchases. Florida's senate, for example, recently approved a 10-day "back to school" sales-tax holiday in August of this year which will exempt sales taxes on purchases of clothing (up to $100) and computers (up to $750) on those days. College students would also receive a one-year tax exemption on textbook purchases.

Legislatures in Ohio, Massachusetts, and Texas are also among those that have proposed or approved sales-tax holidays in recent months.

So, politicians love to vote for sales tax holidays. But that doesn't mean they actually help small businesses.

In fact, a 2014 report by the Tax Foundation says that sales-tax holidays really don't lead to a significant boost to affected businesses' sales. "Sales-tax holidays do not promote economic growth or significantly increase consumer purchases," the report says. "The evidence shows that they simply shift the timing of purchases. Some retailers raise prices during the holiday, reducing consumer savings."

Instead, the Tax Foundation report says that tax holidays create complications for small retailers that must reprogram their cash registers to not charge sales tax on the specific days and products covered by the tax holiday. Retailers often must have extra inventory stocked in case demand does indeed surge on those days, creating more headaches.

"Sales-tax holidays force businesses to operate under more than one set of sales-tax laws each year," the report adds. "These include non-intuitive and sometimes absurdly minute regulations about the holiday's operation."

Former University of Michigan economics grad student Adam Cole also studied the effects of sales-tax holidays and found that purchase timing accounted for 40 percent to 90 percent of increased sales on those days. He noted that the overall increase in sales of items included in the sales tax holiday (such as computers) was less than 1 percent over a few-month period—suggesting that shoppers shift their spending to take advantage of the holidays, but the holidays did not generate much higher spending overall.

A 2010 study by the Federal Reserve Bank of Chicago found that tax holidays do indeed increase sales of the included items significantly on those days. But the researchers acknowledge that shoppers may simply be shifting their spending to those days—not spending more overall. They also noted that sales-tax holidays often fail to achieve all their political goals, including helping low-income families (which the researchers found often don't buy more on the holidays). "Policymakers should beware that the STH is not a panacea—especially when weighing its effects against the foregone tax revenue," the authors wrote.

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